The European Commission has recognised that a prudential framework designed for banks should be simplified for non-banks and has therefore published legislative proposals that aim to introduce more proportionate and risk-sensitive rules for investment firms. Under these proposals, the vast majority of investment firms in the EU would no longer be subject to rules that were originally designed for banks. At the same time, the largest and most systemic investment firms would be subject to the same regime as European banks and regulated as banks.

The proposed framework is based on a firm’s actual activities, its market presence and risk profile, and to achieve this, a proportionate approach is proposed. The proposal includes:

  • new and simpler prudential rules for the large majority of investment firms which are not systemic, without compromising financial stability; and
  • amended rules to ensure that large, systemic investment firms which carry out bank-like activities and pose similar risks as banks are regulated and supervised like banks. As a consequence, the European Central Bank, in its supervisory capacity, (the Single Supervisory Mechanism) would supervise such systemic investment firms in the Banking Union. This will ensure level playing field between the large and systemic financial institutions.

Firms are divided into three classes.

  • Class 1  Those systemic investment firms which carry out certain bank-like activities (i.e. underwriting and dealing on own account) and have assets over €30 billion. These systemic firms will be regulated as banks and fully subject to the same treatment as banks.
  • Class 2 – For larger non-systemic firms, the rules introduce a new way of measuring their risks based on their business models using K-factors. For firms which trade financial instruments, these will be combined with a simplified version of existing rules.
  • Class 3 – The capital requirements for the smallest and least risky investment firms will be set in a simpler way. The rules will be comprehensive and robust enough to capture the risks of investment firms, yet flexible enough to cater to various business models and ensure that these firms can remain commercially-viable. These firms would not be subject to any additional requirements on corporate governance or remuneration.

Current status

The ECON committee of the European Parliament has adopted the Commission proposals albeit with some amendments.

Some of the changes are:

  • Increasing some thresholds for client money and safeguarded assets to keep more Class 3 firms out of Class 2
  • Revised definitions of K-factors such as removing investment advice from assets under management K-factor (K-AUM) and eliminating the overlap between the latter and client orders handled (K-COH)
  • Different haircuts for segregated client money held (K-CMH) and non-segregated
  • Allowing firms that deal on own account to remain on CRR if they so wish
  • Widening the definition of liquid assets to include cash at bank and certain liquid financial instruments
  • All firms will have to hold PII


Parliament and the Council will now begin negotiations and if agreement is reached before the end of the current session of Parliament, then the Regulation and Directive could come in effect as early as 2020. However, if agreement is not reached, 2021 is a more likely date.


This is hopefully the beginning of the end for the more disproportionate parts of CRD for many investment firms. For non-MiFID investment firms, the FCA may take the opportunity to align its own rules with the new approach. Whilst there will be some simplification of prudential compliance for some investment firms, it may not reduce regulatory capital requirements for all and indeed, for some firms, the prudential burden may well increase – for example, exempt CAD firms.

We recommend that you work out which class you will fall into and model the capital you will need based on the latest ECON proposals and plan for any shortfall. We can help you do all of this.

Please get in touch to find out how we can help you prepare for the changes and challenges ahead.

Prudential regime updates from September:

ECON votes to adopt draft reports on the revised framework Press release 24.09.18
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